Shielding Money Creation from Severe Banking Crises : How Useful are Proposals Offered by the Alternative Reform Plans?
Since credit and money creation is the domain of commercial banks, a severe banking crisis may bring the process to a halt. This has occurred on several occasions in the past: during the Great Depression of the 1930s, during the Japanese two lost decades since 1990, and after the recent global banking crisis in some Eurozone countries. In all these cases the central banks' ability to revive credit and money creation was radically reduced. The severity of the recent global banking crisis and its negative impact on money creation prompted the reappearance of alternative banking reform plans among which the best known are the Chicago Plan and the narrow banking proposal. Both schemes display weaknesses which make their comprehensive implementation improbable in the full proposed form. Nonetheless, in some respects they are useful as a benchmark for assessing the recent proposals for banking structural reforms put forward by Paul Volcker, John Vickers and Erkki Liikanen. (original abstract)
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